Is The USA Manipulating Its Own Currency Before An Important IMF Meeting?

Secular Investor's picture

US Dollar Chinese Yuan

Any exporting nation should be happy with a weak currency. For starters, it should increase the demand for manufactured goods that are in the country and on top of that it should increase the domestic demand for a country’s industrial output as it will become more interesting than importing a lot of the goods.

A simple example might be helpful here. When the Dollar is cheap and the Euro expensive, would airline carriers place an order with Boeing or Airbus? The answer is pretty straightforward, as everyone with a common sense about how economics work would say that Boeing would get the order due to a cheap dollar, reducing the expense in the third currency compared to buying an Airbus in Euro.

EURUSD Chart

So, the Euro went down the drain lately and has lost approximately 25% of its value compared to the US Dollar in less than a year time. That’s obviously excellent for the exporting countries in the Eurozone, but then the question arises why on earth the US government (or the Fed, for that matter) allows the US Dollar to appreciate this fast? It would only need a few comments from Fed chair Yellen saying the Fed will not raise its interest rate this year to make that happen.

So, why didn’t she do so? Why does the USA seem to be happy with its expensive currency which is slowly suffocating the export-focused sectors of its domestic industry? There might be another factor at play here, a factor everybody has chosen to ignore.

The IMF system is based on Special Drawing Rights, or ‘SDR’s’ in short which is considered to be an IMF reserve asset. The IMF itself defines an SDR as a ‘potential claim on the freely usable currency reserves of member countries’. The SDR’s were originally based on the value of gold, but this was later converted to a basket of the Euro, Japanese Yen, the US Dollar and the British Pound which were considered to be the main reserve currencies of the world.

Fast forward to 2015. What might these SDR’s have to do with the wish of the USA to have a strong Dollar instead of a weak dollar? Just a few weeks ago, China has hinted to the IMF it would like to see the Chinese Yuan being included in the basket of foreign currencies. This isn’t an unrealistic claim as China has become one of the world’s economic powerhouses. It’s extremely important to note the next IMF meeting to discuss the basket of currencies included in the SDR system is scheduled for the end of this year (the previous meeting was in 2011, so China doesn’t get a lot of chances to be included).

This might have worked as a red flag for the USA. The addition of a fifth large currency could effectively undermine the credibility of the US Dollar as it would see its importance in the SDR system being reduced. This could (and very likely will) lead to the fact all foreign central banks would dump a part of their Dollars to buy the Chinese currency and this flood of US Dollars couldn’t just reduce the purchasing power of the Americans, it would also mean the complete end of an era of cheap borrowing costs. As a large part of the total amount of outstanding US Dollars isn’t ‘in circulation’ but just held by central banks, the borrowing costs for the US government are much lower exactly because the amount of USD in circulation.

World Reserve Currency 2

Source: Forbes

It’s not easy to try to calculate the impact, but professor Kenneth Rogoff of Harvard University estimates the status of the US Dollar as world reserve currency saves the public and private sector approximately $100B per year. If the foreign central banks (which have approximately 60% of their assets in US Dollars) would drop the ratio of USD vs total reserves to 50%, the total additional bill for the country could be close to $20B per year. If the ratio would get diluted to 40%, the difference might be as high as $55-60B per year. This means that more than half a trillion of wealth will be evaporated by 2025, and as much $2.2 TRILLION could disappear by 2050.

World Reserve Currency

Source: JP Morgan

Needless to say it’s in the very best interest of the USA to avoid a fifth currency (or gold) to be part of the IMF ’s SDR system. But another question and part of the equation is whether or not China would even be interested to get its currency in the SDR basket?

The answer is yes. Back in March of this year, China’s prime minister has made an official request to the International Monetary Fund to ask the fund to include the Chinese Yuan as fifth currency in the basket. The timing of this request is impeccable because the basket is up for revision by the end of this year and the Chinese now have several months to convince the IMF they are willing to take all measures to ensure a better and more transparent trading system for its currency. The IMF is definitely open for the idea as Lagarde, the head of the IMF, has confirmed ‘the Yuan will be part of the SDR basket at some time in the future’.

So the recent strength of the US Dollar could be yet another trick of the Federal Reserve and the US Government to emphasize the need of a strong US Dollar as part of the official IMF basket of currencies. This working theory could make a lot of sense given the fact the United States just cannot afford it to see its status as main reserve currency slide.

>>> Check Out Our Latest Gold Report!

Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.

 

Follow us on Facebook @SecularInvestor [NEW] and Twitter @SecularInvest

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
teutonicate's picture
teutonicate (not verified) May 7, 2015 12:32 PM

"Is The USA Manipulating Its Own Currency"

Of course, they are doing it by artificially suppressing the prices of assets that the public perceives as safer alternatives, such as gold and silver.

They have been doing this for years.  This said, I do understand that the focus of your article is "why" they are doing this.

My sense is that it has a lot to do with a select group that wants to buy up assets with an artificially valued currency, right before they let it fall.  The longer that they can prop it up (by incurring losses at taxpayer expense) the more time it gives them to accomplish this. 

TheCentralScrutinizer's picture

Given the huge debts out there, and the decreasing global demand (because assets are artificially OVER-valued), it stands to reason that Gold and Silver would decline.. 

As asset values correct to reflect actual demand, currencies go up in price relative to those commodity values.

One would think as debts unwind, or even default, the value of cash will increase until it finds an alternative safe haven.  This is what NIRP and ZIRP are about..  flushing out cash from being lent to banks (deposits) and making it inflate the value of alternative assets.

Money supply is quite large, no doubt about it..  But Monetary velocity is lanquishing below pre-1960 levels, which reflects no demand.

So how to make demand increase, without causing a run on the banking system (who wants to pay to have the bank borrow money from them?).. 

It's going to require increasing the purchasing power of what money people have (discretionary income, which isn't much)..    Which requires major deflation in prices to "incentivize" them into making purchases/investments, IMO.. 

Either that, or it's going to require some major economic event that forces that makes "savers" move into alternative assets.. (war, QE4.. etc). 

I still think the USD is going to move higher..  It has the potential for the DXY to move to 120, or even 143, over the next few years.

The question is whether that's good for US equities?  It seems the US markets, which I find bizarre, to move upward right now, when a higher dollar should make them fall.  A higher dollar means lower profits for US multinationals.. 

When I see gold and silver rising ALONGSIDE a rising US Dollar, that may be a sigal to prepare to move into those metals.

Scrutinizer

TheCentralScrutinizer's picture

Let me get this straight..  

The US is trying to manipulate the value of USD in order to keep the Chinese out?

Yet, because the Yuan is pegged to the US Dollar, both currencies are rising in value..  

Could just as easily say the Chinese are manipulating the Yuan and dragging the US Dollar up as well..

Now.. MAYBE that would make sense if the intent of the US were to cause China's export competitiveness to deteriorate markedly in advance of that IMF meeting..   Possibly even forcing Bejing to break the peg on the US Dollar..

That kind of manipulation I might understand, despite the consequences for US multinational profits.

Scrutinizer 

mkkby's picture

This is absolutely right.  It makes NO SENSE for the yuan to be included while it is pegged to the dollar.  First the chinks have to freely float their currency.  Then they can be seriously considered for SDR or reserve status.

This is years away.  A non story for 2015.

tarabel's picture

 

 

First, the Axis was supposed to bury us.

Then the Soviet Union.

Then the Arabs.

Then the Japanese.

Then the EU.

Then the BRICS.

I hear Ecuador now has their financial sixgun strapped on.

And that Holland guy who moved to Germany certainly has a hard-on for Uncle Sam.

So if those two get together with the Chinese, they could be the "ECH" powers.

Dropping the dollar into the toilet automatically impoverishes several generations of people all over the planet who have packed their safes full of Uncle Sam's vintage money, including the managers of the Chinese Communist Party's $1.3 T joint 401k account.

So, yeah, I'm all for it. Take out a hundred's years worth of dirty dealing garbage and start the shiny new dollar all over again.

Wanna guess who will rule then?

 

Counterpunch's picture
Counterpunch (not verified) tarabel May 6, 2015 6:13 PM

I'll guess its X, where X is 'the set of people, places or things not suggested by Tarabel.'

You're a fucking idiot.

theyjustcantstop's picture

the propaganda continues.

the g-20's, who came to power through their gold holdings, now trying to convince everyone, even their own citizens that gold really isn't a factor in a countries financial stability, it's just a relic.

the Yuan will be included in the sdr's, because behind closed doors the bis knows china will be place sizeable buy orders of gold, and will vacuum up any physical that comes into play, and then let the world decide who to do business with.

at $2,000.00 to $3,000.00 an ounce how many sell, orders will their be in gold eft's to buy physical, it's like selling your house, and keeping the deed.

paper gold will turn into real gold very quickly, until all that's left is bad paper.

 

lasvegaspersona's picture

$20 Billion??? That's nothing...the Fed drops that much on hooker tips and during QE it is a rounding error. I agree the US wants to keep the dollar as the reserve currency but the numbers here don't add up.

 

assistedliving's picture

China thinks in centuries; we think in quarters.  China is firing an opening salvo, warming up the idea, hoarding/mining gold and getting their ducks in a row for the time we beg them to join.   

Bananamerican's picture

"China thinks in centuries" which is why they've fucked up their environment in decades?

JadeDream's picture

Well, sacrificing a bit of future welfare for faster development to compete on the world stage (for more future welfare) sounds like a sound strategy to me...

opportunity costs, man!

Anyways Chinese pop. can thrive on half of the soil~

Leles's picture

It's 100% unrealistic to assume that a completely non convertible currency can be taken seriously as a reserve currency. 

TheReplacement's picture

Please list all of the places you CANNOT convert yuan in the G20.

janus's picture

mainland china...for starters.

Leles's picture

It's 100% unrealistic to assume that a completely non convertible currency can be taken seriously as a reserve currency. 

KnuckleDragger-X's picture

I think China is wanting into the SDR as a political move since they would have to float against the other currencies instead of them pegging it wherever they want or need to. The FED however looks at the Yuan as a possible disruption in their control of the global system. China won't be allowed into the SDR basket which will give them an excuse to use a different system (SWIFT et al) which will do much more damage to the dollar long term....

JadeDream's picture

China has already mentioned it's wish for yuan to be considered as SDR. 

I think that it is scary if so. The current system does not need another member, but rather someone to destroy it and start anew.

JadeDream's picture

China has already mentioned it's wish for yuan to be considered as SDR. 

I think that it is scary if so. The current system does not need another member, but rather someone to destroy it and start anew.

kchrisc's picture

Down in Mexico the sewage systems cannot handle toilet paper, and so baskets are placed next to toilets to collect soiled toilet paper. At the end of the day one is left with a baskets full of shit paper--SDRs.

Liberty is a demand. Tyranny is submission.

messymerry's picture

It works that way in Greece too...

;-D

Arius.'s picture
Arius. (not verified) May 6, 2015 11:34 AM

this is marxist, statist, conspiratorial thinking, it gives bureacrats much more credit than they deserve.

US government people are some bureacrats making at most couple of hunderds a year.  Governments everywhere in the world are powerless to markets, people like Soros have much more to say than some burecrats/

FX markets are trillion dollars a day markets and cannot be manipulated daily by some bureacrats...

Max Steel's picture

things are going above your head . leave it dude .

Consuelo's picture

If or when China decides to reveal its official gold holdings, the 'IMF' won't matter as it will be a no-brainer whose currency you can trust.    The IMF at that point can either choose to follow or disappear in a cloud of irrelevance. 

lunaticfringe's picture

Some believe the big reveal happens next month. I sure hope so. China has a shit ton of gold- thinking there is the possibility they have more than us.

VooDoo6Actual's picture

Nah say it ain't so ..... The Economic Wars & games continues. It all changes too IF the SDR's baskets mandates to being Gold backed, Not too mention the TPP deals & take into consideration if the US Empire gives Saudi Yemen for expansion & Turkey / Isreal get Syria for their expansion. The modern day Rome of the "American Empire" continues it's ruse under the guise of Freedom & Democracy. Americans are too busy w/ the media to realize they are being eaten & attacked from within & are the targets of their very own American Exceptionalism. America about to become a "TYRANT O SAURUS WRECKS". A whole lot of smupid & smupidity.

Sheeple, it's what's for dinner...

viahj's picture

the SDR basket (if it is to survive) must be rebalanced.  replacing the Yen with the Yuan and possibly removing the Pound as well.  gold/commodity backing will determine weight, this is why China has been buying gold and other resources.  this has been a theory i've talked about for years here at the Hedge.  an artificially strong USD also makes sense in the runup to the rebalance.

unplugged's picture

Are you kidding?  You have to ask?  hahahahaahahaha!!!

The shorter - much shorter - list is:  what ISN'T the USA manipulating/controlling

Toolshed's picture

Interesting article. It is severely flawed however, as it is written from the perspective that decisions at the IMF are based on something other than political considerations.

Sudden Debt's picture

Any article on the Us reserve status needs to be 5 book volumes long to mention all the factors in play.

 

Crocodile's picture

Are not all the decisions based on lies and damn lies from those at the top down to the bottom?  So where there are lies and damn lies there is power and control since the whole world stands upon a heap of lies; it is the truth that will bring it all down.

SuperVinci's picture

"the United States just cannot afford it to see its status as main reserve currency slide."

 

It's not up to them.

JadeDream's picture

So who is it up to? Illuminati?